Specialty Lines Markets
The EPLI market
Employment practices liability presents growth opportunities for agents
By Dave Willis
“I intend to send a clear message: That making our economy work means making sure it works for everyone. That there are no second-class citizens in our workplaces, and that it’s not just unfair and illegal—it’s bad for business—to pay someone less because of their gender, or their age, race, ethnicity, religion or disability.”
—President Barack Obama, January 29, 2009, as he signed his first bill as president, the Lilly Ledbetter Fair Pay Restoration Act.
Employment practices liability is a major growth industry, says Marla Donovan, CPCU, vice president, product development, at the Farmington Hills, Michigan, headquarters of Burns & Wilcox. “I’m not sure the buying public has figured that out yet.” Contributing to this growth is a government shift, marked by President Obama signing the Lilly Ledbetter Act, which had been languishing for years.
“It is now the law of the land: No employer can pay employees differently for the same job based on gender or age,” Donovan adds. “That is a huge, huge deal!” And not just for Fortune 1000 firms. “This can apply to anyone who employs someone.”
“I’d characterize the EPLI market as competitive,” says Hartford, Connecticut-based Bob Sargent, CPCU, RPLU, ARM, executive vice president, Mercator Risk Services. “There are classes and territories where pricing still is declining.”
In others, pricing is up and underwriting is becoming more restrictive. “We’ve seen carriers in certain states or classes tightening coverage or refining underwriting,” he adds. “We’ve certainly seen retentions increasing.”
In recent years, carriers have entered the market rather freely. While newcomers may not have reserve issues, they also may not have statistical experience to refine underwriting and rating processes, Sargent notes.
Still, expertise runs deep. “Most new entrants have teams of people with a lot of experience in the business,” Sargent notes. “EPLI is underwritten on a very narrowly segmented basis with a lot of dimensions. There’s an advantage to having underwriters who have been in the market for a while, who can slice and dice the business.”
Competition shows little sign of letup. “Most carriers have been pretty aggressive over the last six months,” says Darryl McCallin, vice president of Rockwood Programs, Inc., Wilmington, Delaware. While some believe market softness may continue, other forces may signal change. Sargent adds, “Two external factors—economic conditions and resulting job loss, as well as legislative and regulatory changes—could have a tremendous impact.”
“As underwriters, we deal with companies that have indicated layoffs,” explains Brad Lacey, CPCU, RPLU, ASLI, ARe, assistant vice president and product manager-management liability at Philadelphia Insurance Companies, Bala Cynwyd, Pennsylvania. “When downsizing is anticipated, we probe deeper.” Underwriters try to determine the extent of layoffs—for instance, is the entire plant closing?—and the cause. Is the company experiencing financial stress?
Other underwriting issues include how lay-off candidates are determined and what documentation exists. “If litigation occurs, documentation is key,” Lacey adds. Even when layoffs are averted, other issues surface. “A cutback in hours causes concern,” he notes, as do benefits reductions and salary freezes. “These can lead to a more hostile environment and weaker employee-employer relationship.”
Laws are always changing, McCallin says. “Agents and insureds should pay attention to the regulatory climate in their state.” A big concern now, he adds, is wage and hour—something that is not universally covered.
Donovan adds, “There is a change going on in government’s role in our lives and government’s view of what that role should be. Main Street America is going to be just as affected as large corporations.”
Agents must address risk management with clients, she adds, and stress the importance of treating employees well, which sometimes is more difficult in tough economic times. “Then,” she adds, “help employers make sure they’re in compliance with the laws.”
Agents also must stress good insurance coverage. “Help businesses manage their assets and consider things that weren’t in play five or six years ago,” Donovan advises. “As businesses decide what to live with and what to live without, EPLI is not the thing to live without.”
Small to medium-sized businesses are, in some ways, most vulnerable, she warns. “Large employers have been aware of EPLI issues for years and have instituted controls and processes. Smaller businesses may be more at risk; they put their heart and soul into building their company, and that asset could be gone tomorrow with one unfavorable ruling.”
To provide greatest value, Donovan adds, agents should educate themselves as citizens. “Follow what is going on in Washington; it matters locally. ‘Google’ the Lilly Ledbetter law and read it.” Also, she says, peruse the EEOC Web site (www.eeoc.gov) to gauge the thinking of the government entity charged with enforcing employment practices. “Agents will quickly realize this will touch every single employer over the next eight years—probably longer.”
Agents need to convert knowledge into sales. To do so, McCallin recommends taking a consultative approach: “Sit down with clients, go through their policy forms together, and explain to them what coverages exist and where their exposure points are.”
Lacey suggests addressing what he calls “the big three—discrimination, wrongful termination and harassment.” Discuss not only the possible consequences of a judgment, but also defense costs. “Even if allegations are false, even if the employer did everything right and documented it properly, defense costs represent a great expense. Having them covered is a great benefit,” he notes.
In a downturn, selling EPLI can be challenging. “Everybody is looking to cut expense somewhere,” McCallin says. “It’s a decision agents need to convince buyers on, and it can be more difficult now because of the affordability issue.”
That said, the product is not cost-prohibitive. “With reasonable deductibles, employment practices liability insurance can be relatively inexpensive,” Lacey says. “Most economical for the small and middle market may be to buy it bundled with other products, such as D&O, and fiduciary liability.”
That’s not always the right way to buy it, though. Separate limits can be important. “Clients should be aware that if they don’t buy separate limits, an EPL claim could exhaust a D&O policy, particularly their personal limits,” Sargent warns. Worse yet, McCallin adds, not all D&O policies have an EPLI coverage element.
Stand-alone EPLI policies for smaller businesses can come in under $1,000—a few bucks a day. It may make sense to take higher retentions or pare back limits on other policies to free up money for EPLI, if such a choice is necessary, Donovan says.
Again, though, money should not be the prime concern in today’s marketplace. Instead, find hot buttons. “Talk about what is going on in the market and the courts,” Lacey advises. “Address the Fair Labor Standards Act. Discuss how employees are paid overtime.”
Remind customers and prospects they have an exposure and, whether they have 25 employees or 2,500 employees, it only takes one, he notes. “And remember, they’re buying defense coverage, if nothing else,” Donovan adds.
Other hot buttons might include the need among some classes for third-party discrimination coverage, Sargent says, as well as coverage for whistleblower and retaliation claims—something he describes as “a long-term growing area, with very significant exposure.”
It’s important for retail agents and brokers to raise employment practices liability issues with clients—not just for the insured’s sake, but also for their own. “Agents need to look at it from their own E&O perspective, if nothing else,” Donovan asserts. “There’s a professional duty to outline what the insureds’ exposures are and what coverages are available. The world is more complicated.”
Recently a producer asked Sargent why a certain provision was not included in an EPL policy that a previous broker had arranged. “The business got a claim that would have been covered under that provision and was asking whether the coverage was available when the policy was in place,” he explains.
“Doing a thorough job of making sure they get the best coverage and the best deal for each of their clients is a challenge,” Sargent notes, “but it’s the appropriate thing for an agent to do. Test the market.”
This requires a combination of expertise and access to a wide range of markets. It’s important for retail agents and brokers to have conversations with trading partners, Donovan adds. “Some agents have relationships with carriers that offer EPLI. Others don’t, so they rely on a wholesaler like us.”
“Retail agents could have that expertise and market access internally, or they could outsource it to a wholesaler,” Sargent says. “Because underwriting differs between carriers, classes and territories, coverage is not always consistent. If a retailer is dependent on just one market, it’s unlikely that market is the best one for all of the agency’s clients.”
According to McCallin, agents and brokers need to “do their homework, compare carriers and what they cover. They need to find out if a particular carrier is viable in the market and can sustain themselves through a tough market.”
Wholesalers and other business partners can help here, as well. “We have recognized that this is a looming trend and have been in dialogue with several insurance markets to make sure we have access to products to help solve the insurance part of this,” Donovan says.
Beyond market access, partners offer education and information. McCallin says, “In working with our agents and brokers, we equip them to share with clients and prospects how valuable the coverage can be.” Part of this involves communicating new employment practices developments, explaining exposure changes and detailing claims frequency increases.
Wholesalers and others can actually help retail agents and brokers sell the product. “We give them a pretty good flavor for what they should be presenting,” McCallin says. “For example, our Web site gets into selling features and overcoming objections.” It also includes claims scenarios that agents and brokers may wish to consider presenting to clients and prospects.
Risk management resources also exist on wholesaler Web sites. Lacey says, “We put on loss control seminars and Webinars for agents and brokers. We try to communicate the challenges in today’s market, what to look for and how the product can respond.”
Adds McCallin, “We have Webinars that help increase understanding for a number of topics, ranging from how to terminate employees to common wage and hour mistakes.”
As employment practices liability issues gain visibility over the next several years, forward-thinking agents and brokers must familiarize themselves with the issues. That way, they’ll be better equipped to serve clients—from the smallest to the largest—and find ways to capitalize on opportunities in this emerging “growth industry.”